This is a CU Colorado Springs student blog for urban economics the economics of social issues.

Tuesday, April 24, 2007

One and Only One Lesson in Economics

Opportunity cost, or said, all costs of an action, immediately visible or otherwise hidden by the 'what may be' and 'what could have been'; is the single most important lesson one can learn in economics. However, the true significance of the lesson lay outside the realm of economists. What makes the lesson of opportunity costs so important is the impact on the overwhelming majority non-economists. Certainly, esoteric lessons in Methodenstreit are important and impact non-economists but if the world could be educated in one idea I would not have a second thought that the idea would be opportunity costs.

Opportunity cost is the foundation for much of economics, it also has deeper applications. Accounting for opportunity costs is the first step in building an abstract or higher model for an individual's thinking and the supreme aegis against the demagoguery of destruction.

The ability for one to explain, “the only cost incurred in selling these tickets is five dollar price tag the tickets carry” is about as common as a glutton for embarrassment at an American Idol audition. In this thought process the individual only sees the immediate cost, the price of the tickets and ignores all the costs, where as the individual keeping opportunity costs in heart would see all the costs like, what the money used to buy the tickets could otherwise be used for and the time it takes to actually sell the tickets. An understanding of opportunity costs will impart everyone from the stay-at-home mom to the prospective businessman with an invaluable tool in accounting for the mundane and monumental.

After 9/11 and Katrina it was common to hear arguments along the lines of, “well at least the rebuilding process will stimulate the economy and add jobs.” What is even more unfortunate about such statements is that sometimes they were coming from economists themselves. The slightest understanding of opportunity costs would prevent the proliferation of such pro-destruction rhetoric. The offending party correctly thinks that some parties will benefit, such as Home Depot, what they fial to understand however is that this benefit comes at an overall detraction to society. Home Depot benefits from the home owners now buying a large amount of their goods whereas previously they would have not. Home Depot then buys more goods from its suppliers, hires more workers and invests more, the workers buy more goods like Ipods and milk, Apple invests more, hires more works etc; and I cant object, this is all true. However, what the destruction dunce fails to account for is the hidden costs. In my example this is the homeowners who had to purchase drywall and beds instead of computers and shoes. So where society had previously had a house and a computer we now have a house and we are all that much worse off because of it. Or maybe we should just run around and firebomb entire cities to stimulate the economy.